money.cnn.com February 21, 2003: 8:58 AM EST By Justin Lahart, CNN/Money Staff Writer

NEW YORK (CNN/Money) - Heading into the open on Friday, Wall Street was sitting firmly on its hands and trying to take deep breaths for fear that it might do anything rash.

Stocks were cued to open steady, perhaps shading toward the positive column, on a day when investors were scratching their heads over what to do next. Although the diplomatic ruckus over Iraq hasn't settled down, it appears that little will really be known until March gets under way and U.N. weapons inspectors give their next report.

"There's a lack of desire to do anything," said Miller Tabak equity strategist Pete Boockvar. "It's not going to be until March that we get a really good idea about what kind of time table were looking at with Iraq."

But the light volume Friday could lead to choppy trading -- particularly since February options on stocks and indexes expire, often a recipe for volatility.

Inflation at the consumer level in January was in line with expectations. The Consumer Price Index rose 0.3 percent for the month compared to 0.1 percent in December. The "core," which excludes the volatile food and energy sectors, gained 0.1 percent, in line with the December reading.

Economists surveyed by Briefing.com had expected the CPI to rise 0.3 percent, with the core logging a 0.2 percent gain. But after the Producer Price Index showed a surprisingly strong reading on wholesale prices Thursday, the market was girded for a higher reading.

The implication is that although companies are paying more for goods, so far they haven't been able to pass these costs onto consumers. The end result, unfortunately for them, is that profits may be getting squeezed.

There was fresh news on the war front for investors to mull over. Thursday night on PBS Defense Secretary Donald Rumsfeld said U.S. and U.K. troops in the Persian Gulf are ready to go to war. This was in contrast with the popular perception that a couple more weeks are needed to put needed forces in place. Certainly politically attacking Iraq now doesn't seem expedient. Rumsfeld's remarks may have been more of an attempt to put pressure on the French and German faction than anything else.

Meantime, the impasse between Washington and Turkey over using Turkish territory as a launchpad for attacking Iraq's northern border appears close to being resolved. Friday Turkish Prime Minister Abdullah Gul said that his government had come to a "mutual understanding" with the United States.

Finally, amid confirmation from U.N. weapons inspectors that Iraq has not increased its cooperation, London's The Times reports the U.N. Security Council has tentatively scheduled a meeting for March 7 which could set the way for a compromise. Chief U.N. weapons inspector Hans Blix is putting together a list of 40 questions for Iraq that could serve as an ultimatum, according to The Times.

Elsewhere, Merrill Lynch made changes in its weighting for five tech sectors. The firm upgraded Internet and storage to "overweight" from "equal weight" and communications equipment to "equal weight" from "underweight," but downgraded the services sector to "equal weight" from "overweight" and hardware to "underweight" from "overweight."

Other stocks to watch Friday include Texas Instruments (TXN: Research, Estimates), which rose in after-hours trading Thursday after it said it plans to buy back up to 18 million shares.

And retailer Nordstrom (JWN: Research, Estimates) reported higher fourth-quarter profits but projected earnings for the first quarter and year that would be near the low end of Wall Street forecasts.

Treasury prices were little changed, leaving the 10-year note yield at about 3.85 percent.

In currency markets, the dollar was steady in light trading after getting drubbed by Thursday's spate of bad economic news.

Overseas, most Asian markets fell, hurt by worries the weakened dollar will damage exports. Tokyo's Nikkei and Hong Kong's Hang Seng both down about 1.5 percent.

With traders unsure of where the U.S. market would head, stocks in Europe were straddling the flatline midsession.

Rumsfeld's words of word appeared to be trumping news that Iraq is illegally exporting a glut of oil. Brent crude oil for April delivery jumped 30 cents to $31.86 a barrel in London.

For analyst comments, click here.  

cbs.marketwatch.com Rex Nutting, CBS.MarketWatch.com Last Update: 3:14 PM ET Feb. 20, 2003

WASHINGTON (CBS.MW) -- Higher prices, slower growth, more layoffs ... a couple more months like this and people will start waxing nostalgic about the days of Jerry Ford and Jimmy Carter.

Have we added inflation to our list of worries about the anemic economy? Is stagflation -- that uniquely dismal marriage of high inflation and stagnant growth -- in our future?

On the surface, the economic data released on Thursday aren't comforting.

"This is the worst economic news day since the 9/11 period," said Ken Mayland, president of ClearView Economics.

Exhibit A: The nation's producer price index jumped 1.6 percent, the most in 13 years, as energy prices rose 4.8 percent on jitters about supplies from the Middle East.

Exhibit B: America's trade deficit surged to a record $435 billion in 2002 with no relief in sight. If the U.S. economy is lame, the rest of the world is crippled. There's no market for U.S. goods. See full story.

Exhibit C: Growth in the manufacturing sector has ground to a halt in the Philadelphia region. Worries about the war are adding to the weak climate for spending and hiring. See full story.

Exhibit D: The labor market is treading water. With new jobless claims totaling 370,000 to 400,000 each week, there's not enough job growth.

The data don't look encouraging. But, on the bright side, things could be worse. A few months ago, the big topics were deflation and double-dip recession. And it was repeat of Herbert Hoover, not Jimmy Carter, that we feared most.

So stagflation is a step up from where we were. But is it really worth worrying about?

The stagnation part is a given, at least for now. Although the recession is over, there's still little growth.

"The U.S. economy could advance soon," Ken Goldstein, a Conference Board economist, said with hope but without much conviction.

Low confidence

Neither consumers nor businesses are confident in the future. Both are burdened with debts and both are putting new cash flow to work repairing balance sheets. Both sectors are waiting. Waiting for the war, but even more waiting for things to get better.

"The fundamental labor market picture does not appear to be changing much, and probably won't -- at least for the better -- until after the war," said Steve Stanley, economist at RSB Greenwich Capital.

Only about a quarter of firms surveyed by the Philadelphia Fed plan to increase hiring or spending in the next six months. About 40 percent of the firms said geopolitical concerns have crimped their capital spending or hiring plans, so you might expect that things would improve once the war is over, or once it's finally begun. Read more.

However, about half of the firms who say the war is holding them back don't have any plans to expand in the first six months after the war.

Clearly, weak demand won't disappear with Saddam Hussein.

The inflation part of the equation is a little trickier.

There are intense deflationary forces at work in the global economy, particularly the competition from low-wage manufacturers like the Chinese.

But at the same time, there are also inflationary pressures stemming from the same war fears that have frozen the American economy in suspended animation.

The global energy system is being squeezed by perfect combination of events. The cold winter in North America pushed up demand just when supply was truly restrained by the general strike in Venezuela.

Add in the uncertainty over Iraqi, Kuwaiti, and possibly other Gulf producers, and you have the recipe for $40 a barrel oil.

At this rate, there may be no cushion left in the system. Any disruption could push energy prices to record-high levels, even when adjusted for inflation. See full story.

Rising oil price

Much of the increase in the January producer price index stemmed from higher oil prices. Gasoline prices rose 13.7 percent and heating oil prices appreciated by 19.7 percent. Tight supplies and rising demand will do that. Read the full release.

But other prices rose in January as well.

Food prices rose 1.6 percent, including big increases in vegetables, meat, fish and even baked goods. The increase in food prices could just be noise in the data. After all, wholesale food prices are up just 0.4 percent in the past 12 months, so there's no trend toward runaway prices.

A 3.5 percent surge in car prices also contributed to the outsized 0.9 percent gain in the core PPI, which excludes food and energy prices. But once again, the January number could be an anomaly: The trend is toward lower car prices, as everyone knows. Wholesale car prices are down 1.4 percent in the past 12 months.

The jump in inflation in January cannot be dismissed by excluding everything that rose. On the other hand, there's little reason to believe that suddenly everything has changed and that businesses all throughout the economy now have the so-called pricing power they crave.

Inflation will hurt the U.S. economy this year. The rise in energy prices has already cut about $50 a month out of household budgets. The business sector is also facing those higher costs and attempts to pass those costs along may not be any more successful than the airlines' failure to impose a fuel surcharge.

Are we in for a repeat of the 1970s? One encouraging sign is that energy matters much less to the economy now than it did then. Each of us uses as much energy now as we did in 1973, but we produce 75 percent more. Rex Nutting is Washington bureau chief of CBS.MarketWatch.com.

More DUE DILIGENCE •Covad selling may be overdone 12:45pm ET 02/21/03 •FCC to rule on Baby Bell network rules 9:34am ET 02/19/03 •XM, Sirius soar as carmakers sign up 5:27pm ET 02/18/03 •McDonald's struggles to reinvent itself 4:33pm ET 02/13/03 •Return of the billion-dollar deals 2:28pm ET 02/11/03

Latest Industry News   Get Alerted on News in this Industry •Updates, advisories and surprises 1:31pm ET 02/21/03 •Covad selling may be overdone 12:45pm ET 02/21/03 •Teeth whitening craze, travel tensions and more 12:20pm ET 02/21/03 •Department 56, Massey, Tupperware, and more 12:11pm ET 02/21/03 •London: Late rally lifts FTSE 11:51am ET 02/21/03 NEW! Get the Before the Bell e-Newsletter Want a to get a briefing of the market before it opens each day? Now you can with the FREE Before the Bell e-Newsletter. Subscribers will get a comprehensive, pre-market look at all the stocks expected to move each day, plus all the early news and action in Europe and Asia. Sign up for the Before the Bell e-Newsletters today! Trading Center

Trade Here! TradeHere! TradeHere!

TradeHere! TradeHere!

PARTNER MARKETPLACE

Get a free copy of your credit report online

Join Ameritrade. Get 25 commission-free trades!

Buy stocks for $4! No minimums required.

The $95 Fresh Start Offer.

Smith Barney Get our FREE Dividends Report

Front Page | Message Boards | Mobile | MarketPlace | Free Membership Feedback | Letters to the Editor | Site Index | Company Info | Jobs | Advertising Media Kit | Licensing

Make CBS.MarketWatch.com your Home Page

MarketWatch.com is traded on the Nasdaq stock exchange under the symbol MKTW.

Partner Sites CBSNews.com | CBS.com | FT.com | BigCharts.com

© 1997-2003 MarketWatch.com, Inc. All rights reserved. Disclaimer. See our Privacy Policy - updated 6/25/02. CBS and the CBS "eye device" are registered trademarks of CBS Broadcasting, Inc. Intraday data provided by S&P Comstock and subject to terms of use. Historical and current end-of-day data provided by FT Interactive Data. Intraday data delayed 15 minutes for Nasdaq, and 20 minutes for other exchanges. SEHK intraday data is provided by S&P Comstock and is at least 60-minutes delayed. All quotes are in local exchange time.

www.forbes.com Reuters, 02.20.03, 2:25 PM ET By Hugh Bronstein NEW YORK, Feb 20 (Reuters) - International investors fretted about Venezuela on Thursday after an opposition leader was arrested, the latest sign that left-leaning President Hugo Chavez, known for his anti-capitalist rhetoric, remains entrenched in power. But selling of the country's sovereign bonds was muted as Wall Street analyzed the risk presented by Chavez versus the tempting rewards offered by high-yielding Venezuelan bonds. Despite his unimpressive economic record, Chavez has sworn to honor debt contracts. "Chavez has won and it appears that he is consolidating his hold on power," said Mark Dow, a portfolio manager at MFS Investment in Boston, referring to a recent two-month national strike that, like a short-lived coup last April, failed to push the pugnacious former paratrooper from office. The strike briefly crippled the oil industry of the world's No. 5 petroleum exporter. Production is still not back up to full capacity. State security police at about midnight seized Carlos Fernandez, a business chief who helped lead the work stoppage. A judge had ordered him and opposition union boss Carlos Ortega detained on charges of rebellion. HIGHER INFLATION ON THE WAY? Dow said he is concerned that recently-imposed capital controls, in combination with the government's weak fiscal position, are setting the stage for Venezuela to print money to cover its public sector borrowing requirements. Such a move would likely increase inflation significantly. "It is almost impossible that Chavez's economic policies will work, so the non-oil economy will continue to deteriorate," Dow said. While emerging market debt on average yielded 7.15 percentage points more than U.S. Treasuries, Venezuela debt yielded an average 13.81 percentage points more than Treasuries. This means investors are demanding much higher yields in exchange for assuming the risks they see in Venezuela. After the Fernandez arrest, investors were left to wonder how far the economy will deteriorate before Chavez is finally forced out, and whether current yields fairly compensate investors for the risks. The answer to the latter question is 'yes', according to Jose Cerritelli, a Bear Stearns debt strategist. "With oil prices so high and with the government's willingness to pay its bonds not in question, people are being more than adequately compensated for the near-term political risk," Cerritelli said. "My recommendation is buy." Three months of negotiations, involving the Organization of American States and a group of countries known as Friends of Venezuela, have made little progress toward hammering out an agreement on early elections. Chavez's term of office is due to expire in January 2007. Jose Pedreira, managing director, Latin World Asset Management, said news of the arrest is not likely to ruffle investors who have come to see the country as an oil play and nothing more. "Chavez has his own agenda and he is not paying attention to what the Friends of Venezuela are trying to do," Pedreira said. "But as long as oil is at $37 per barrel investors are not paying much attention to this kind of news." Dissident Venezuelan oil workers said on Thursday that output was at 1.4 million barrels per day, compared with 3.1 million barrels before they launched the strike in December. The government said output stands at more than 2 million barrels per day.

reuters.com Thu February 20, 2003 11:55 AM ET By Susan Schneider

NEW YORK, Feb 20 (Reuters) - Emerging sovereign bonds meandered sideways on Thursday as investors, captive to global war worries, stayed on the sidelines awaiting fresh developments in the U.S.-led march toward a possible strike on Iraq.

J.P. Morgan's Emerging Market Bond Index Plus posted a scant 0.24 percent return on the day as market heavyweight Brazil gained 0.18 percent. Brazil's benchmark C bond BRAZILC=RR slipped 0.25 point to 69.875 bid.

With the United States facing fierce opposition in the United Nations Security Council in its push for a war in Iraq, emerging markets investors were making few moves pending new clues on the timeline and international support for an attack, analysts and traders said.

Investors "are just waiting to see what's going to happen on the global backdrop, what the conditions are going to be for war and diplomacy," said Siobhan Manning, Latin American debt strategist at Italian investment bank Caboto.

"You don't want to take any risks. You don't want to take any huge positions. You just want to batten down the hatches and wait and see what happens with the war," she added.

The United States and Britain said on Wednesday they would introduce a resolution within a week seeking U.N. authorization for a war against Iraq, which U.S. President George W. Bush sees as justified because he says the nation is producing banned weapons.

While the broader market tread water, a handful of sovereign debt issuers made modest moves on Thursday.

Venezuela's debt slid after the state security police captured a business chief who helped lead a general strike against President Hugo Chavez. A judge ordered the leader, Carlos Fernandez, and union boss Carlos Ortega detained for rebellion.

"It's pretty quiet. The only real price movement has been Venezuela," said an emerging debt trader. "People are taking (the judge's arrest orders) as a little bit negative, that Chavez may be gaining some ground."

Fernandez and Ortega spearheaded a two-month opposition strike, started in December, in a bid to force Chavez to call early elections or resign. Chavez has taken a tough stance against his foes since the leaders called off the strike in early February to ease the burden on the private sector.

"It's more proof that Chavez has the upper hand, the opposition is weaker, and it really raises the risk of when or if he will step aside," said Manning. "It's an event like this that caps the upside for Venezuela."

Wall Street would love to see a more market friendly leader replace the former paratrooper Chavez, who has introduced currency curbs and price controls in a bid to bolster an economy battered by recession and the strike's strangling of the nation's lucrative oil production.

Venezuela's DCB bond VENDCB=RR slid 0.25 point to 69.625 and the nation's share of the EMBI-Plus lost 0.08 percent.

URUGUAY GAINS, ECUADOR EXTENDS RALLY

Uruguay remained an emerging markets focus in the midst of lingering uncertainty about whether the nation will undertake some kind of debt restructuring.

Uruguay, ravaged by the fallout of Argentina's financial crisis and a run on its own banks, failed to pass an IMF review in December on its $2.8 billion loan program. The IMF said this week it expects a deal on Uruguay's 2003 economic program within coming days. Last week IMF sources said talks included a possible restructuring of the nation's debt.

On Wednesday, U.S. Treasury Undersecretary for International Affairs, John Taylor, weighed in on the issue, saying Uruguay may need help to close its financing gap and this may include "some action" on the country's debt. But Taylor said the gulf might be narrowed through fiscal adjustment or with additional aid.

The nation's 2012 dollar bonds URUGLB12=RR , which have lost half their value over the past year, moved slightly higher in early trading with a gain of 0.75 point to 43.0 bid.

Ecuador, meanwhile, extended its strong showing of recent days on optimism over a $200 million loan deal with the International Monetary Fund. The nation's share of the EMBI-Plus rose 1.32 percent on the day, adding to the 20.1 percent the debt has already added so far this year.

Ecuador's new President Lucio Gutierrez has taken tough austerity measures to help close a 2003 financing gap estimated at $2 billion. The efforts helped pave the way for a long-elusive IMF deal that analysts have said is necessary to help Ecuador avoid a cash crunch.

The fund's executive board is slated to vote on the Ecuador accord next month.

www.cbc.ca Last Updated Thu, 20 Feb 2003 11:11:20

TORONTO - A war against Iraq could drive already-high oil prices up even more, possibly past $50 US a barrel, a Canadian bank economist cautioned Thursday.

Oil prices are up on war jitters"We believe that the war premium on oil prices amounts to as much as $4 US a barrel and prices could spike above $50 US a barrel if there is a war against Iraq," Earl Sweet, assistant chief economist at BMO Financial Group, said in a commentary.

If a war does happen and oil prices spike upward, the increase likely won't last for long. Governments will likely free up some of their strategic reserves to take the upward pressure off prices, Sweet said.

"War issues aside, given recent significant increases in OPEC output and the usual sharp decline in demand during the spring, we expect oil prices to ease from their first quarter highs and to average $25.75 US per barrel in 2003, and $22.75 US per barrel in 2004," he said.

On Thursday, West Texas Intermediate oil, the U.S. benchmark, was trading at $37.18 US per barrel.

Rising oil costs have been hitting Canadian consumers in their wallets. Higher oil prices have pushed up the cost of gasoline and home heating oil sharply in recent weeks.

The national average for a litre of regular gasoline hit 82 cents this week, up 1.3 cents from the previous week, according to consulting firm MJ Ervin & Associates Inc. The average price of home heating oil jumped 0.4 cents to 68.7 cents a litre.

BMO Nesbitt Burns said energy prices rose 13 per cent alone in January.

"There is no question that the driving forces behind the oil price increase have been the war premium caused by ongoing uncertainty in the Middle East and the strike-induced sharp reduction in output in Venezuela," Sweet said.

The same gloomy international political forces sent world investors into traditionally safe havens such as gold, he added.